Bernankes point that credit markets are fragile

Federal Reserve Chairman Ben Bernanke warned late Monday that the federal government should do more to stave off home foreclosures that threaten credit markets and the economy, even as a Fed survey showed the percentage of banks tightening credit for consumers and businesses reached historic highs.

Underscoring Bernanke's point that credit markets are fragile, the Fed's latest quarterly lending survey for the three-month period through April 17 showed:•About 70% of domestic lenders have made it harder for consumers to get home equity lines of credit, while about 50% have tightened terms for those with existing home equity loans in the past six months. In some cases, the amount of the loan has been cut. The tougher standards are a response to falling home prices.

•About 30% of U.S. banks have ratcheted up standards for credit cards, compared with 10% in the previous three months. Banks are reducing credit limits and requiring consumers to have higher credit scores. •Banks expect to approve fewer student loans this year than they did in 2007. Of the 29 domestic banks that originated student loans under a federal program last fall, many expect decreased business. •About 55% of banks reported imposing tougher standards on commercial and industrial business loans to large and middle-market firms, up from about 30% in the previous survey. •Nearly 60% of domestic lenders have set tougher standards for safer prime mortgages, while an even larger slice of banks making riskier loans has tightened up.

The tough outlook for consumer and business borrowers comes despite months of Fed interest rate cuts and other efforts to infuse billions of dollars into credit markets.

In a speech to the Columbia School of Business in New York City on Monday night, Bernanke said: "Finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy," But he noted the difficulty of finding the right balance, "particularly the need to avoid programs that give borrowers who can make their payments an incentive to default." The House this week will debate a bill allowing the Federal Housing Administration to refinance borrowers into new loans, after lenders reduce loan principal. Bernanke didn't endorse the specific measure, but reiterated suggestions that cutting loan principal or other permanent loan changes may be necessary in many cases. He said the FHA and mortgage giants Fannie Mae and Freddie Mac should play a bigger role.

Financial markets have been working through a severe credit crunch since last summer, when home foreclosures began to climb. That hurt financial firms and investors holding mortgage-backed securities. Credit problems have spread to a host of products, including business and even college student loans."Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest," Bernanke said.

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